Crucial Backing for ‘Bank’ of Alibaba

In China it’s tough to make a play in a developed industry with entrenched interests and state-run giants often standing in the way of would-be new market entrants.

But the government seems to be behind a recent set of moves by Alibaba Group Holding Ltd. that make a part of its operations look more like a bank than e-commerce champion.

On Monday, the Shenzhen Stock Exchange released a statement confirming that Alibaba can now tap investors directly to finance its loans to small and medium enterprises that use its e-commerce platform. The approval will likely help Alibaba’s loan program grow and defray risk to investors willing to invest in a product comprised of small Alibaba loans made according to its massive data records of the behavior of businesses that use its site to do business.

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Within the statement, the Shenzhen Stock Exchange linked the approval directly to a June meeting of China’s cabinet, known as the State Council, that called for greater access to credit for small and medium enterprises. Though the statement doesn’t say the State Council mentioned Alibaba directly, the call is one of a number of recent positive signs for the company as it seeks to use its e-commerce acumen to shake up China’s financial industry.

In June, Alibaba got verbal support from China’s securities regulator for a separate product that allows users of its online payment affiliate Alipay to deposit extra money they have stored online into a money-market fund. The comments came despite a statement from the regulator that the service wasn’t in full compliance with Chinese regulations and further paperwork would need to be filed.

Also in June, Jack Ma, the founder of the Chinese e-commerce giant, said in an interview in the Communist Party mouthpiece newspaper, the People’s Daily, that the Internet would prove a key tool for reform of China’s financial system, which he said failed to serve 80% of the people.

Calling China’s financial regulators “excessive,” Mr. Ma added, “it’s hard for us to change history, but we could change the future. We would only have a chance 10 years later if we start to prepare now. It might be problematic that we introduce opening right now, but today’s problem could become an accomplishment 10 years from now.”

Though the interview was marked off as opinion, it was carried out by a high-ranking reporter with the paper, underlying its import. It is also unlikely such a key figure as Mr. Ma would release such a direct criticism of the financial system without some form of high-level backing.

Given widely stated prescriptions for China’s slowing economy by economists, it also makes sense for the government to back Alibaba’s new efforts. The company said average interest on its loans to small businesses is just 6.7%, well below what smaller companies could expect to pay to borrow money through other channels. Since the company began distributing loans three years ago, it has lent out more than 100 billion yuan despite an average loan value of 40,000 yuan. The average length of Alibaba’s loans is 123 days while non-performing loans amount to just 0.87% of total loans distributed as of the second quarter, according to the company.

That means Alibaba is not only giving out cheap, short-term loans to the small businesses that have historically proven one of the most dynamic parts of China’s economy. It means the company is also doing a good job of picking which companies will pay those loans back. Given the government’s recent efforts to stamp risky underground lending that flourishes due to the lack of credit available to many smaller companies, the Alibaba solution indeed doesn’t look like a bad one at all, though of course its current scale is far too small to have a big impact on China’s economy.

Nonetheless, current signs point to the government being open to the experiment. Of course if Alibaba’s efforts pick up steam in a more significant way, it may start to see more pushback from the big banks and powerful regulatory institutions that dominate the finance industry.

The Shenzhen Stock Exchange statement said that Alibaba, in cooperation with Orient Securities Co., can issue 10 products to raise a total of 2 billion yuan to 5 billion yuan ($324 million to $809 million) over the next three years. The statement also said it was the first time such a product would be listed, calling it an “important” step, but also one with risks, which the exchange will ensure are monitored properly.

The new product allows Alibaba to break those loans up and sell them to investors, defraying risk and potentially allowing Alibaba to increase with ease the scale of its loans. The statement also said the new products would help Alibaba better service the “real economy” by providing financial services to small businesses. Analysts often point out that China’s largest banks focus too heavily on giving loans to the country’s largest state-run enterprises and well-connected businessmen.

On Monday, an Alibaba Group spokesperson said “these asset securitization plans will further enhance Alibaba’s ability to serve small businesses and contribute to the development of China’s economy by leveraging resources from different sources.”

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